Stocks (S&P 500) Poised to Breakout from Range

The stock market has been meandering with no real direction since hitting its year-to-date peak over a week ago. During this time, the S&P 500 has formed a tight consolidation pattern. Stocks now appear to be poised for a major breakout in one direction or the other.

S&P 500 is Bearish … and Bullish

The benchmark index is currently doing much better than late December’s -20% below the September all-time high. It was the definition of a bear market back then. But now it’s still languishing around -10% from that high as of the market close on 1/29/2019.

A more bearish technical theme has recently surfaced. The S&P 500’s line-up of three key moving averages now displays a typical downtrend. The longest moving average (200-day) is on top, the middle moving average (100-day) is in the middle, and the shortest moving average (50-day) is on the bottom. It’s the correct order of moving averages for a bearish trend.

But despite this bearish technical signal, stocks have been engaged in an exceptionally sharp overall rally for the past five weeks.

Stocks Between a Rock and a Hard Place

In short, the S&P 500 continues to seek direction in an increasingly ambiguous market environment somewhere between bear and bull. And the stock index is treading in a technical no-man’s land between two key price levels.

As shown on the chart, there’s key support to the downside at the 50-day moving average, currently around the 2610 level. This is also a support level going back to the October low.

And to the upside is major resistance around 2715. That resistance is a combination of the 100-day moving average and a key 61.8% Fibonacci level (measured from September’s all-time high down to the late December low).

Where Will Stocks Go From Here?

As long as the S&P 500 stays within this trading range, its likely that market choppiness will remain. And there should also continue to be very little in the way of an identifiable trend. But any breakout above or below the range could very well set the stage for one of two outcomes:

An extended rebound back up to resume the long-term bull trend, or

A fall back down once again towards bear market territory

Keep in mind that many more company earnings releases are set for Wednesday, 1/30/2019, and the rest of this week. Even more importantly, though, will be the U.S. Federal Reserve’s (FOMC) interest rate and monetary policy decision. (Check out our popular Market Events & Earnings Calendar for more upcoming scheduled events.) While there are no expectations of a Fed rate hike on Wednesday, investors will be watching closely for two main areas of interest:

How the Fed sees the likelihood of a recession on the horizon, and

The plan for unwinding of the Fed’s massive balance sheet

Both of these topics will take center stage on Wednesday, along with some key earnings releases, as bulls and bears once again fight for dominance.

IMPORTANT: The information above should not be construed as investment advice and should not be considered as a solicitation to buy or sell securities. Trading and investing in the financial markets involves substantial risk of loss, and may not be suitable for all investors.

Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock may be mentioned.

A veteran global macro trader/analyst, Bart focuses on major market moves in currencies, commodities, fixed income, and global equity indexes. Bart stresses inter-market correlations and dynamics while keeping a close eye on risk. He has published countless market analysis pieces and has been a guest expert for a variety of major financial media. Contact Bart